SINGAPORE (S&P Global Ratings) June 21, 2022--Asia-Pacific issuers are battling inflation and rising borrowing costs. This comes amid a backdrop of record-high debt and curtailed financing. S&P Global Ratings projects scenarios in which 16%-25% of rated entities could face downside risk to their credit quality amid mounting inflation and rising funding costs.
This is according to a chartbook-style commentary published today, titled, "APAC Corporates: Inflation, Rate Strains Set In."
The article addresses numerous questions we have been receiving regarding the credit effect of inflation and rising funding costs across the region under different scenarios. It outlines a high-level analysis of the sectors, geographies and rating levels in which issuers are the most exposed to rating downside.
"Broad-based raw material inflation and rising funding costs are two of the biggest challenges to corporate credit quality in Asia-Pacific for the next six months," said S&P Global Ratings credit analyst Xavier Jean.
Asian companies are no stranger to exogeneous shocks such as volatile raw material costs, fluctuating funding costs, and fast-changing investor sentiment. But these factors are now coinciding with more leveraged balance sheets across the region and a pick-up in capital spending in 2021 amid recovering profits.
Given shrinking rating headroom, issuer-specific characteristics are likely to shape corporate credit profiles more than broader macro or sector dynamics.
"Issuer-specific initiatives to offset external strains and restore financial headroom, be it with price increases, moderate spending or debt repayments, will be critical to avoid a wide-ranging round of rating downgrades over the next 12 months," said S&P Global Ratings credit analyst Abhishek Dangra.
Key Takeaways
- Increasingly compressed margins and rising borrowing costs are eroding the rating headroom restored in 2021, potentially leading to credit downside.
- About 16% of companies risk breaching downside financial triggers under sensitivity scenarios that account for moderate inflation and rising funding costs.
- The real estate, capital goods, and airport sectors are most at risk due to a higher leverage or sensitivity to cost inflation. Commodities, branded non-discretionary consumer, and regulated utilities are less exposed.
- Firms in China, India, and the Pacific region face higher downside risks due to a preponderance of asset-heavy sectors or a rapid increase in domestic interest rates.
- A doubling of interest spreads from current levels and accelerating inflation across Asia-Pacific could put 25% of rated companies at risk of breaching downside financial triggers through 2023.
- Entities within the 'BBB' to 'CCC' ratings categories are exposed to cost inflation and interest-rate increases well into 2023, with higher debt, rising capital expenditure, and margin compression reducing rating headroom.
- The prevalent risk-off sentiment from investor and increasingly selective capital markets are exacerbating eroding finances for the weaker entities rated in the 'B' category and below.
LIVE WEBINAR & Q&A Please join our S&P Global Ratings analysts for a live webinar and Q&A on Friday, June 24, 2022, at 11:00 AM Singapore time. We will discuss our views on Asia-Pacific corporate issuers' exposure to inflation risk, using a sensitivity analysis.
Please register via this link: https://event.on24.com/wcc/r/3844069/FF34FD68BECBC317D394FA8F60DAD0F8?partnerref=MR
This report does not constitute a rating action.
The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
| Primary Credit Analysts: | Abhishek Dangra, FRM, Singapore + 65 6216 1121; abhishek.dangra@spglobal.com |
| Xavier Jean, Singapore + 65 6239 6346; xavier.jean@spglobal.com | |
| Media Contact: | Richard J Noonan, Melbourne + 61 3 9631 2152; richard.noonan@spglobal.com |
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